1. Field of the Invention
The present invention consists of a method for using a general-purpose computer and one or more processors to estimate target pricing and price indicators for traded securities, such as stocks, bonds, and related composites and derivatives including indices, funds, and options. Such methods are commonly used to identify market price disparity, anticipate price movements, guide investment timing or strategy, initiate or recommend a trade, hedge, or hold position in a security, set a target price level, analyze price stability and potential for up or down price swings, gauge investor or market sentiment, manage an investment portfolio, or conduct investment analysis and decision support activities.
2. Description of the Prior Art
As known in prior art, price of a security may vary pursuant to an earnings surprise, changes in growth rate, changes in attractiveness of an industry or asset class, shifts in market liquidity and availability of buyers and sellers, market movements based on macroeconomic factors such as inflation or interest rate changes, or other significant security, industry, or market news and events.
Existing security pricing models commonly utilize fundamental analysis or technical analysis in order to determine a target price or anticipate a price movement. Fundamental analysts often measure price using a discounted cash flow model of expected future earnings, relying on assumptions regarding projected growth rates, and taking into consideration business factors such as historical security and industry performance, business risk and debt level, management team, and competitive position. Thus, price evaluation is based on business performance and assumes that a forecasted target price will be eventually reached. However, fundamental analysis often results in differing projections based on growth rate and annuity model assumptions, and suffers from subjective weighting and application of multiple factors affecting price, with some of the available information at times being out of date.
Technical analysis relies on chart pattern recognition and attempts to anticipate direction of a price movement through comparison with similar historical chart patterns. This approach assumes that market price reflects all relevant information about a security, that price moves in trends driven by investor sentiment, and that history and observed price patterns repeat themselves. Technical analysis utilizes various indicators which typically consist of price and trade volume transformations in order to identify a trend and forecast future price movements. Technical analysis remains controversial and is generally viewed as inconclusive as it can result in contradictory predictions depending on the specific indicators or approach that is utilized.
A number of security related attributes and ratios are commonly used including share price, earning per share (EPS), price to earnings ratio (PE), daily trade volume, money flow rate, market capitalization, and support or resistance level. In general, terminology can vary across different security types but parallels can be drawn for use with the security pricing method. For example, in case of bonds, share price may be replaced with the open market value, and earnings may be substituted by a product of coupon rate and par value. Similarly, in case of funds, earnings may be evaluated as the aggregate or proportionally weighted earnings of the underlying securities in a fund. The method and system can be further applied to other markets and exchanges for commodities, goods and services by drawing appropriate parallelisms and substitutions.
The concept of support or resistance level is utilized in technical analysis as a price level that establishes the low or high price point respectively in the event of a falling or rising price trend. A common practice is to assume that the price movement trend will halt and potentially reverse at the point or within a close proximity of this level. However, no underlying mechanism has been identified and there is no assurance that a support or resistance level will in fact successfully hold.
Several security investment styles are in common use, including “value” and “momentum” based investing. Value investing focuses on securities that appear undervalued due to what an investor may consider as temporary and reversible factors, and the premise that a security's price will surge once the conditions change. Momentum investing, on the other hand, relies on identifying a rising or falling price trend and leveraging the wave of positive or negative investor sentiment respectively, on the assumption that a security's price movement maintains its direction while the investor sentiment remains unchanged.
Accordingly, what is needed is a security pricing method that combines the strengths of fundamental analysis and its use of historical data about a security, together with the strengths of technical analysis in the form of price indicators, without material reliance on subjective, variable, uncertain, unexplained or speculative elements. Such method shall utilize historical security data and optional projected estimates, such as quarterly earnings estimates, as input into a security pricing model, which in turns generates target price and price indicators for a security.